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Drop in Prices may mean Drop in Spending

13 June 2012

After economists at TD Bank released their report saying that Vancouver and Toronto home prices were going to drop by 15 per cent, now both Vancouver and Toronto mortgage brokers are saying that it could mean a drop in spending. One mortgage broker out West says that as homeowners grow more concerned about their personal balance sheets and what’s to happen when the value of their home falls, they’ll start saving for the “just in case” scenario.

One Vancouver mortgage broker, Chris Pughe says, “People will likely rein in spending – not take that vacation, or make purchases that are not necessary – as they expect their net worth may drop. ”

But, she also went on to say that in addition to just saving more, falling home prices could have disastrous effects on homeowners, and that it could mean losing their homes for some. She continued on, “Some people who have used their equity to sustain their lifestyle choices may make the decision to sell because there is nothing else for them to do. A drop in prices could have serious consequences for some of our families.”

Pughe also points to one more fallout that would occur from dropping home prices, and that’s the fact that lenders may be more restrictive in who they lend to. “Lenders may underwrite with more cautious policies when it comes to loan-to-value ratios,” she said. “This may apply to both purchases and definitely home refinancing. We have already seen some changes in Canada Mortgage and Housing Corporation’s policies when they decreased the maximum loan-to-value ratio on a refinance from 90 per cent to 85 per cent.”

But, Tsur Somerville, Director at the Centre for Urban Economics and Real Estate, disagrees with Ms. Pughe, saying that very simply, Canadians don’t walk away from their homes. “In Canada, our history is very much that people continue to make their mortgage payments,” he said. “People do not approach real estate as a purely arm’s-length investment.”

And Mr. Somerville also doesn’t think that a drop in prices would mean more difficulty for homeowners to get refinancing either, as lenders only look at a borrower’s payment history. “Historically,” he said, “banks just look at whether you’re making your payments, rather than viewing it as a whole new loan.”

What do you think? Will Canadians become more savings-conscious with the prediction that prices are to fall? Or do you think we’ll continue spending until the housing market, and falling property values, force us to stop?

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